Thursday, November 20, 2008

An Auto Bailout Would Be Terrible for Free Trade

Congress is now considering a federal bailout for America's Big Three automobile companies. Many want to grant them at least $25 billion on top of $25 billion in low-interest loans approved earlier this year.

But these figures represent only a fraction of what the total cost of the bailout could be. In a global economy, a federal bailout of the automotive industry could cost Americans jobs as well as foreign markets to trade in. There are at least three important ways an industry bailout could damage America's engagement in the global economy and hurt U.S. companies, workers and taxpayers.1. The first global cost of a bailout could be less foreign direct investment (FDI) coming into the United States. Will fewer companies look to insource into America if the federal government is willing to bail out their domestic competitors? The answer is an obvious yes. Ironically, proponents of a bailout say saving Detroit is necessary to protect the U.S. manufacturing base. But too many such bailouts could erode the number of manufacturers willing to invest here.2. The bailout's second global cost could hit U.S.-headquartered companies that run multinational businesses. This access to foreign markets has been good for America. But it won't necessarily continue. Will a U.S.-government bailout go ignored by policy makers abroad? No. A bailout will likely entrench and expand protectionist practices across the globe, and thus erode the foreign sales and competitiveness of U.S. multinationals. And that would reduce these companies' U.S. employment, R&D and related activities. That would be bad for America, and rising trade barriers would also hurt the Big Three, all of which are multinational corporations that depend on foreign markets.3. The bailout's third global cost could fall on the U.S. dollar. A critical foundation of foreign-investor confidence in U.S. assets has been transparent competition in our product markets -- competition that spurs economic growth and rising average standards of living. To keep that up, it is important to address concerns related to allowing foreign companies to compete on U.S. soil, not by bailing out struggling companies but by taking care of workers who are dislocated in the give-and-take of a competitive market. Will a federal bailout that politicizes American markets bolster foreign-investor demand for U.S. assets? Not likely. Instead, America runs the risk of creating the kind of "political-risk premium" that investors have long placed on other countries -- and that would reduce demand for U.S. assets and thereby the value of the U.S. dollar.Conclusion: This week Congress is weighing the cost of the bailout. Let us hope that lawmakers realize that the true cost of such a bailout is far larger than any check the U.S. Treasury will have to write in the coming months.~Matthew Slaughter, associate dean and professor at Dartmouth's Tuck School of Business, writing in today's WSJ

5 Comments:

US auto companies are like a patient in intensive care, with three tubes siphoning away their life-blood: high current wages, retiree health-care commitments, and their dealer-network. Now, they want the government to stick an intravenous tube in them, and give them some more life-fluid. Of course it'll work in the short term. Of course it will allow buy the patient time. However, what good is that time if nothing is done about the three outflows? And -- height of ridiculousness -- some legislators want to stick in a fourth outflow tube in the form of enviro-crap.

And, how can those three outflows be stopped? They're all based in contractual obligations. In theory, the Union pay might be open to rollback as a condition of a bailout, but I don't know the legalities of that. What about the other two? The solution is: GM must break its contracts. The only legal way that can happen is to declare bankruptcy.

1. The first global cost of a bailout could be less foreign direct investment (FDI) coming into the United States.

I have been watching the media coverage for the last several days and this point seems to be either ignored or glossed over. There are several "foreign" auto makers which are producing and have been expanding in the U.S. These auto makers hire American workers as well. Yes, they may be HQ'd overseas, but they produce here and are publicly traded so I would imagine most of these companies have some level of ownership in the U.S. as well.

If the German government decided to shore up VW's competitive advantage by pumping $$ into its company, the Big 3 would foam at the mouth to have the U.S. government act in some way to counter the investment (e.g. higher taxes on auto FDI in the U.S.). How is Detroit not to expect the same if the shoe is on the other foot?

Also, all of this hype about the sanctity of the U.S. autoworker seems a bit one-sided. Where is the concern for those hardworking U.S. autoworkers in the southern states who are doing providing their labor at a much more competitive wage? What happens to them if (and this won't happen) by the U.S. govt. shoring up the Big 3, they become more competitive and take market share from Toyota, Hyundai, etc.? Is it fair to jeopardize the employment level for those workers simply to save union auto workers jobs? It would seem that non-union autoworkers are 2nd class citizens when compared with the UAW.

Spot on. Agree that only Chapter 11 would allow GM to change these contracts.

Additionally, the union employees and the dealer network keep GM locked into maintaining 8 different brands when its competitors Toyota & Honda each have just 2. When you look at the product line-up, GM has multiple models that compete with a single Toyota model like the Camray.

Life has changed from the days when GM had the lion's share of the market. Unless the company can completely restructure, it will not be viable.

DB,

One wonders whether propping up the Big 3 would violate the WTO rules.

There has been a rising wave of anti-globalization and protectionism in recent years. When the world's leading advocate of free trade embarks on bailing out domestic producers, one cannot underestimate the consequences. A substantial percentage of U.S. GDP comes from trade.

When you throw billions at the finance industry, is it any wonder that ailing companies suddenly emerge on all sides hoping for government larges?

The best line yesterday was from the senator who asked the CEO's of the Big 3 to raise their hand if they had flown to Washington on a regular, commercial flight. "Let the record show, that no hands were raised." How bad is it when you're still using a private company jet?

"There has been a rising wave of anti-globalization and protectionism in recent years."

Especially poignant when one considers the recent G20 meeting. The consensus among participants was to "refrain from raising new trade barriers — but only for the next 12 months." How might U.S. subsidization of the auto industry effect that outcome?

The biggest beneficiaries of the auto company bailouts are UAW members. This bailout is about keeping their vastly overpriced jobs and scoring points with union members nation- wide. The second biggest beneficiaries are the businesses located near the manufacturing plants in Michigan. The country as a whole loses. Economically (as many have noted), the bailout is illogical (throwing good money at failed firms that will never recover) and counterproductive (money diverted to the bailout will partly come from successful business who will not be able to hire as many workers).